The 'Head Trader' In The Biggest Insider Trading Case Has Been Identified

Nov. 29 (Bloomberg) -- Phillipp Villhauer was the head trader at SAC Capital Advisors LP who allegedly helped the firm founded by Steven A. Cohen make $276 million on trades that led to the arrest of an ex-hedge fund manager for insider-trading, according to two people familiar with the matter.

Villhauer is referred to only as the “Head Trader” in a Securities and Exchange Commission complaint filed Nov. 20 in Manhattan federal court against Mathew Martoma, said the people, who declined to be identified because the matter isn’t public. He is referred to in an FBI complaint filed that same day as the “Senior Trader.” Martoma denies wrongdoing. Villhauer hasn’t been charged or sued.

“If this trader is not a cooperator, he is or soon will be in the government’s crosshairs,” said Andrew Frisch, a New York attorney and former federal prosecutor who isn’t involved in the case. “The government will see him as either a potential cooperator against others or as a worthy target by himself.”

Villhauer didn’t immediately return a call seeking comment. Jonathan Gasthalter, a spokesman for Stamford, Connecticut-based SAC, the $14 billion hedge fund founded by Cohen; Ellen Davis, a spokeswoman for U.S. Attorney Preet Bharara in New York; and John Nester, an SEC spokesman, all declined to comment.

The day the SEC sued Martoma, the agency told SAC it may sue the firm for fraud over the trades, according to three people familiar with the matter. The SEC’s so-called Wells notice cited fraud and control-person liability over SAC’s management of CR Intrinsic Investors LLC, the unit where Martoma worked, according to one of the people.

Illegal Tips

Martoma, 38, is accused of using illegal tips in 2008 he gleaned from a University of Michigan neurologist about a clinical trial of an Alzheimer’s disease drug developed by Dublin-based Elan Corp. and Wyeth LLC, now owned by New York- based Pfizer Inc. The doctor, Sidney Gilman, leaked data on the trial to Martoma, who advised Cohen on whether SAC should buy or sell Elan and Wyeth shares, the SEC said. Gilman is cooperating with the probe.

SAC had built a $700 million position in Elan and Wyeth by July 2008, when Gilman told Martoma that the drug didn’t perform well in the clinical trial, according to the regulator. On Sunday, July 20, Martoma and Cohen spoke for 20 minutes, according to the government.

On Monday, July 21, Cohen and Martoma instructed SAC’s senior trader to “begin selling the Elan position, and to do so in a way so as to not alert anyone else, inside or outside of the hedge fund,” according to the FBI complaint filed against Martoma. Cohen isn’t named in the filing, which refers to him as the “Hedge Fund Owner,” or the SEC complaint, which calls him “Investment Advisor A.”

Dark Pools

By day’s end, the head trader e-mailed Martoma to say he sold 1.5 million shares of Elan and “obviously no one knows except you me and” Cohen, the government said. The head trader used algorithms, or programs that disguise orders and keep them from being exploited by faster traders. He also used dark pools, or exchanges that hide the identity of the buyers and sellers to execute the trades, according to the SEC.

The next weekend, Cohen received an e-mail from the head trader saying the firm sold 10.5 million shares of Elan at an average price of $34.21.

“This was executed quietly and effectively over a 4 day period through algos and darkpools and booked into two firm accounts that have very limited viewing access,” according to the e-mail, the FBI said. “This process clearly stopped leakage of info from either in [or] outside the firm and in my viewpoint saved us some slippage.”

Elan Shares

On Monday, July 28, after selling all of its Elan shares, SAC shorted about 4.5 million more shares over the next two days, authorities said. The firm, having sold all of its Wyeth shares, also shorted about 3.25 million shares of that stock.

Over the preceding week, the firm’s trading of securities represented 20 percent of the reported Elan trading volume, and 11 percent of the reported trading volume in Wyeth stock.

After the market closed, Elan and Wyeth released the drug trial results to investors and analysts. By the next day, Elan shares fell 42 percent and Wyeth shares fell 12 percent. Analysts cited the fact that patients didn’t improve on the drug.

As a result, SAC gained profit and averted losses of $220 million on Elan and $56 million on Wyeth, the SEC said.

Awarded Bonus

The following January, Martoma was awarded a bonus of $9.38 million for his work over the previous year, based largely on the results for Elan and Wyeth, the government said. He received no bonus for his work in 2009.

By May 5, 2010, the U.S. said an SAC employee recommended that Martoma be fired after losing money, saying he appeared to be a “one trick pony with Elan.” He was fired.

The criminal case is U.S. v. Martoma, 12-mj-02985; and the civil case is SEC v. CR Intrinsic Investors LLC, 12-08466, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Katherine Burton, Saijel Kishan and Kelly Bit in New York and Joshua Gallu in Washington. Editors: Patrick Oster, David E. Rovella

To contact the reporters on this story: David Voreacos in Newark, New Jersey at dvoreacos@bloomberg.net; David Glovin in New York at dglovin@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.